Former AIG CEO Greenberg wins bailout lawsuit
WASHINGTON – The former chief executive of American International Group Inc. on Monday won a lawsuit that alleged the federal government went too far in taking a majority ownership stake in the firm as part of its 2008 bailout, but a federal judge said he awarded no damages because the company would have gone bankrupt without the assistance.
After a high-profile trial that included testimony by former Federal Reserve Chairman Ben Bernanke and two ex-Treasury secretaries, Judge Thomas C. Wheeler ruled that the Fed overstepped its authority in taking a 79.9 percent stake in the insurance giant in exchange for an $85 billion loan that helped keep the firm afloat during the financial crisis.
The loan – the first part of a complex bailout that ultimately totaled $125 billion – was “an illegal exaction under the 5th Amendment,” which prohibits the government from taking private property “without just compensation.”
“There is no law permitting the Federal Reserve to take over a company and run its business in the commercial world as consideration for a loan,” wrote Wheeler, a judge on the U.S. Court of Federal Claims.
Despite his findings, Wheeler did not award any money to AIG’s former longtime chief, Maurice R. Greenberg, or other shareholders.
Greenberg had claimed damages of more than $40 billion.
Although the Fed wasn’t permitted under law to take the ownership stake, “the government did not cause any economic loss to AIG’s shareholders,” Wheeler said. He quoted a financial adviser to AIG’s board during the financial crisis, who noted that “20 percent of something is better than 100 percent of nothing.”
“The inescapable conclusion is that AIG would have filed for bankruptcy, most likely during the week of September 15-19, 2008,” Wheeler wrote in his 75-page ruling. “In that event, the value of the shareholders common stock would have been zero.”
The Fed’s loan “significantly enhanced the value of the AIG shareholders’ stock,” Wheeler said.
The Fed said in a statement Monday that officials believed the central bank’s bailout was “legal, proper and effective” and “prevented losses to millions of policyholders, small businesses, and American workers who would have been harmed by AIG’s collapse during the financial crisis.”
“The terms of the credit were appropriately tough to protect taxpayers from the risks the rescue loan presented when it was made,” the Fed said.
Greenberg, who built AIG into a financial powerhouse, was ousted as the company’s CEO in 2005 after an accounting scandal.
In 2011, Greenberg’s Starr International Co. insurance firm sued the federal government on behalf of AIG shareholders claiming the bailout amounted to an illegal taking of their property.
The government eventually increased the amount of money it pledged to AIG to about $182 billion and its ownership stake to 92 percent. AIG later repaid the $125 billion it actually borrowed and the government sold its stake. Taxpayers ended up with a net $22.7 billion profit from the bailout.
Andrew Stoltmann, a Chicago investors’ lawyer specializing in securities lawsuits, agreed with Wheeler’s decision not to award any damages.
“Had Greenberg been able to secure a recovery it would have been a real miscarriage of justice,” Stoltmann said. “AIG executives and their reckless conduct were to blame for the losses, not any actions taken by the federal government.”